Hedge funds have warned the City regulator that new rules designed to shore up rights issues could backfire and push up the cost of raising capital as they tried to delay today's introduction of new disclosure requirements for short-sellers.

The Alternative Investment Management Association, the hedge fund trade body, told the Financial Services Authority in a strongly worded letter that the "flawed" disclosure rule "undermines the confidence of the wider financial industry that its regulator will 'play fair' ".